Monthly Archives: October 2012

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WASHINGTON — A Treasury economist rummaging in the department’s library has stumbled on a historical treasure hiding in plain sight: a transcript of the Bretton Woods conference in 1944 that cast the foundations of the modern international monetary system.

If you have an iPad (or other Apple electronic reading device), you can download a free Kindle app from the iStore. It will let you read files formatted for the Amazon Kindle. You should then be able to buy the book from Amazon and read it on your iPad. Similar apps may be available for other electronic reading devices.

This paper by Dan Thornton should be taken very seriously: “Monetary Policy: Why Money Matters, and Interest Rates Don’t.” Dr. Thornton is a well known economist at the St. Louis Federal Reserve Bank (Vice President and Economic Adviser) with a long track record of influential publications in major professional journals.

The CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO) announced the issuance of time-limited no-action relief for swap dealers (SDs) and major swap participants (MSPs) concerning certain recordkeeping obligations under Part 23 of the CFTC’s Regulations. The no-action letter will delay until March 31, 2013, the compliance date for the following provisions:

(1) The requirement that SDs and MSPs make and keep records of all oral communications related to pre-execution swap trade information (and communications that lead to the conclusion of a related cash or forward transaction), pursuant to Commission Regulations 23.202(a) and (b);

(2) The requirement that SDs and MSPs maintain all transaction records and daily trading records in a manner “identifiable and searchable” by transaction and counterparty, pursuant to Commission Regulations 23.201(a)(1), 23.202(a) and 23.202(b);

(3) The requirement that SDs and MSPs use a Coordinated Universal Time timestamp when recording quotations prior to and at the time of execution of a swap, pursuant to Commission Regulations 23.202(a)(1)(ii), (a)(2)(iv), (b)(3) and (b)(4); and

(4) The requirement that SDs and MSPs retain swap records at their principal places of business or such other principal offices as designated by the SDs or MSPs.

The relief provided in the no-action letter is available to all SDs and MSPs.

Lofchie Comment: The no-action relief alludes to a number of the problems that have surfaced with the CFTC’s rules including the following: (i) in certain instances, there is “[no] technology . . . currently readily available” that would allow firms to comply; e.g., compliance may in fact be impossible; (ii) in certain instances, complying with the requirements of the CFTC would result in a violation of non-U.S. law (referred to in the letter as inconsistent with principles of “international comity”); and (iii) in certain instances, the requirements of the rule are “ambiguous and, as a result may present Firms with significant impementation challenges depending on how . . . [the Rule] is interpreted.” While it is obviously a positive that the no-action letter was issued, the letter also raises questions as to the rulemaking process.

I now begin a promised series of posts over the next several weeks that will offer some extra comments and tidbits of material that did not make it into The Bretton Woods Transcripts.

As befitted a British lord (he was made Baron Keynes of Tilton in 1942), John Maynard Keynes’s style at the Bretton Woods conference was often lordly. The economist Gail Makinen recounted to me a chat he once had with the late Jacques Polak, a junior member of the Dutch delegation at Bretton Woods who later achieved eminence at the IMF. Makinen asked, “Did you meet Keynes?” Polak quipped, “I met Keynes, but I don’t know if Keynes met me.”

The CFTC issued an interpretative statement as to the conditions under which information held by a Swap Data Repository could be accessed by a non-U.S. government. The statement exempts foreign regulators from either entering into a confidentiality agreement relating to such data or from agreeing to any indemnity in connection with any litigation relating to the data. Under the guidance, non-U.S. regulators can “access data in which they have an independent and sufficient regulatory interest, even if that data also has been reported pursuant to the CEA and Commission regulations.” In order to access such data, the foreign regulator would have to have “oversight responsibilities” for the SDR in the foreign jurisdiction, but the SDR would not necessarily have to be “registered” in the foreign jurisdiction.

The interpretation was issued by a 3-2 vote, with Commissioners Sommers and O’Malia dissenting. One of the points made in the dissent was that the interpretative statement provides non-U.S. regulators with easier access to the relevant data than it does to U.S. regulators generally.

Lofchie Comment: According to the statement by CFTC Chairman Gensler, this interpretation gives non-U.S. regulators potential “unfettered access” to trading information held by an SDR in light of the “traditions of mutual trust and cooperation among international regulators.” It would seem that, without stretching its authority, a non-U.S. regulator could obtain information about any transaction involving any party which had a connection with the relevant non-U.S. jurisdiction, or that was trading in a commodity or asset (e.g., energy) in which the non-U.S. jurisdiction had an interest. This interpretation may be controversial, as various U.S. parties may believe that either they or the U.S. generally has an interest in imposing greater procedural restrictions on access to U.S. transactions by non-U.S. regulators.

SEC Commissioner Elisse B. Walter delivered a speech addressing the importance of municipal bond disclosure to investor protection and the Commission’s continuous concern of inadequate disclosure. Walter highlights the underlying sources of the issue. For instance, existing law does not allow the SEC to set baseline disclosure standards for issuers of municipal bonds or require that municipalities make fundamental information, such as audited financial statements, available to investors. The SEC can only provide indirect oversight in the municipal market through regulation of the intermediaries who underwrite and sell municipal securities and, under Dodd-Frank, regulation of those who provide financial advice to municipalities. Commissioner Walter argues that this “second-class” status treatment of municipal investors by the SEC must change.

Commissioner Walter goes further to argue that enforcement alone isn’t enough for the following reasons: (i) enforcement cases often happen after violations are committed and, by then, it’s too late to make investors whole; (ii) getting the answer wrong puts one in the nuclear zone (e.g., getting pension disclosure wrong can lead to antifraud charges); and (iii) antifraud provisions are broader than disclosure standards and may not provide ideal guidance for avoiding the next disclosure problem. Walter also praises the ways in which Chairman Mary Schapiro has adopted amendments to enhance investor protection. In 2010, she announced an agency-wide effort to examine the municipal securities market and tasked Commissioner Walter with leading the effort. These efforts culminated in the SEC Report on municipal securities (linked below), which provides extensive information by municipal market participants and outlines Commission recommendations for addressing their concerns.

In general, their concerns include market structure and disclosure practices. Commissioner Walter focuses on the issue of disclosure practices in her speech and begins to lay out various recommendations (mostly from the SEC Report) to enhance disclosure. Some of these recommendations include: (i) granting the SEC authority to set baseline disclosure standards; and (ii) requiring municipal issuers to have audited financial statements, as appropriate. The goal is to move forward promptly so that the Commission will be in a position to consider adoption of final rules on municipal advisers sometime in the early part of next year. To that end, Commissioner Walter also outlines a timeline of initiatives which she believes would enhance disclosure in the municipal securities market.

• Amending Part 30 of the regulations to require FCMs to hold sufficient funds in secured accounts to meet their total obligations to both U.S.-domiciled and foreign-domiciled customers trading on foreign contract markets, computed under the net liquidating equity method;

• Prohibiting FCMs from holding any positions in a Part 30 secured account other than customers’ foreign futures and option positions and associated margin collateral;

• Requiring FCMs to hold sufficient proprietary funds in segregated accounts and Part 30 secured accounts to reasonably ensure that the firms are properly segregated and secured at all times, and to cover margin deficiencies in customers’ trading accounts;

• Requiring FCMs to maintain written policies and procedures governing the maintenance of excess funds in customer segregated and Part 30 secured accounts, and requiring FCMs to obtain the pre-approval of management prior to the withdrawal of 25 percent or more of the excess funds held in segregated or secured accounts if the withdrawals were not for the benefit of the FCMs’ customers;

• Requiring FCMs to provide the Commission and their respective designated self-regulatory organizations with daily reporting of the segregation and Part 30 secured amount computations, and semi-monthly reporting of the location of customer funds and how such funds are invested under Regulation 1.25;

• Enhancing the standards for the self-regulatory organizations’ examinations of member FCMs.

Comments Due: Comments must be received on or before [INSERT DATE 60 DAYS AFTER PUBLICATION IN THE FEDERAL REGISTER].

Lofchie Comment: This is a very extensive set of rule changes (the Release runs over 400 pages) that will require close review by FCMs.

On the one hand, it was inevitable that there would be significant additional custody and related requirements imposed on firms following the failures of Peregrine and MF Global. (Many of the requirements, such as the required procedures around the handling of customer funds, are a direct function of the specific events leading to the failure of those two firms. In fact, one might trace the changes to the part 30 rules and to the supervision of customer funds largely to MF Global.) On the other hand, these changes are not necessitated directly by Dodd-Frank, but lie on top of all that is required under Dodd-Frank. At some point, one wonders just how many rule changes, even rule improvements, the financial system can tolerate in a short period of time.

One interesting aspect of the rule changes is the increased responsibility put on futures SROs for the supervision of FCMs. Given the tremendous scope of the new Dodd-Frank responsibilities assumed by the CFTC, it would seem likely that we will see a greater imposition of regulatory responsiblities on the SROs. This would be consistent with the historical direction of the regulation of broker-dealers.

The transcripts of the Bretton Woods conference were never meant to be published, but we have them.

Today the CFS releases The Bretton Woods Transcripts, an e-book edited by me and Andrew Rosenberg. It contains verbatim proceedings of many meetings from the 1944 Bretton Woods conference, which established the IMF and World Bank and began an era of international economic cooperation that endures today. The Web page for the book contains much more information about it, plus extensive background material that is being made readily available for the first time. Over the next few weeks I will comment here on elements of the book, and offer some details about the conference and its participants that are not in the book.